02/28/2013 07:57 EST | Updated 04/29/2013 05:12 EDT

Canadians Are Over-Paying for Pharmaceuticals Year After Year

pharmaceutical pills scattered...

When the topic of universal drug coverage comes up in this country, the debate often runs aground on the question of cost. In an environment of government austerity, few seem willing to embrace the idea of a new, national government program.

But a single-payer, universal system would not bankrupt the health care system. Quite the opposite, in fact; we're paying too much for prescription drugs now, and a single-payer system might just be what would save our health care system because it would be cheaper -- a lot cheaper.

The first way a single-payer system for prescription drugs lowers total costs for medicines is through reduced administration costs. Drug plans spend a considerable amount of money on administration. This includes a range of tasks, such as negotiating contracts, identifying beneficiaries, collecting revenues, processing claims, providing information, managing risk and marketing.

A 2010 report by the World Health Organization estimates that administrative costs for private health insurance are on the order of about 15 per cent of spending in wealthy countries, including Canada. The same report estimates that administrative costs for public health insurance systems in wealthy countries are only 5 per cent of spending -- public estimates for Canada are even lower, about 2 per cent.

Administrative costs differ because, when there are multiple insurers in a system that must compete with each other, most administrative costs are duplicated by every insurer. For-profit insurers must also provide their shareholders a return on investment. In contrast, there is no duplication of administrative costs in a single-payer system and some administrative costs -- such as marketing -- are eliminated altogether.

The additional costs of administration and profits required in a multi-payer system add up substantially. Given that about $10-billion worth of prescription drugs are financed through private insurance in Canada, a single-payer system could reduce administrative costs in the system by approximately $1 billion per year.

A multi-payer system also reduces the bargaining power of insurers and thereby increases the costs of drugs for Canadians. This is particularly important now that drug prices are increasingly being determined through the negotiation of confidential rebates paid directly by manufacturers to insurers.

An insurer acting as a single payer on behalf of an entire province or country has considerable purchasing power. In effect, manufacturers will give single-payer systems their best available prices because the rewards of accessing the entire market for a province or country are great -- especially when the alternative is to lose the entire market.

Research has shown that the single-payer for pharmaceuticals in New Zealand negotiates brand-name drug prices that are roughly 40 per cent lower than Canadian prices. Even the United Kingdom, with a high concentration of pharmaceutical sector investment, pays 18 per cent less than Canada for patented drugs. If we had U.K. prices for those drugs here, we would save $3-billion per year on the nearly $17-billion we pay for patented medicines.

The discounts single-payers can achieve on generic drug prices can be even bigger.

Canadian provinces recently announced that they were working together to limit the prices of six top-selling generic drugs to just 18 per cent of brand name prices in Canada. This would save governments approximately $100 million. That sounds impressive -- but the prices agreed upon by governments here are about ten times higher than prices single-payer systems achieve in other countries such as New Zealand. Savings on that order applied to the roughly $6-billion we spend on generic drugs would reduce drug costs in Canada by $4-billion per year.

A single-payer pharmacare system could save Canada $8-billion per year through lower drug prices and improved administrative efficiency. But implementing a system that would deliver better drug coverage at lower cost will nevertheless require political will. It would be the biggest health reform of a generation and likely would meet strong resistance from those whose incomes are dependent on excess spending in our current system.

On February 26 and 27 over 200 policy-makers, patient advocates, health professionals, manufacturers and insurers came together in Vancouver for PharmaCare 2020, a national symposium to promote clarity about the future of prescription drug coverage in Canada. This conference sets a dialogue in motion that has been a long time coming.

We need to start working together to fix our broken health system. We can't afford not to.

Steve Morgan is an expert advisor with and Associate Professor and Associate Director of the Centre for Health Services and Policy Research at the University of British Columbia. Follow Steve on Twitter @SteveUBC